Abercrombie & Fitch: Evaluating The Expansion Plans

After seeing some sluggish years in the post-mortgage crisis era, retail sales are expected to reach pre-2008 levels in the coming years. As per the forecasts in the table below, the world retail market is expected to grow at an average rate of approximately 4% per annum, in the next 4 years. The growth in the developed markets of North America and Western Europe are likely to remain slow in the coming years. The major growth in the retail industry is expected to come from emerging markets.

Source: Economist Intelligence Unit

In line with these trends, Abercrombie & Fitch Company (NYSE:ANF) has announced in its recent SEC filing that it is going to open stores in multiple international locations in an attempt to "leverage the international appeal" of the company's brands. In the statement, the company has named certain countries in which it is going to open flagship and Hollister stores and today we would be looking at those countries in order to predict the prospects of ANF.

New Stores

"We expect to open Abercrombie & Fitch flagship locations in Seoul and Shanghai and approximately 20 international Hollister stores. The Hollister openings will include our first stores in Australia, our first store in the Middle East in Dubai through a joint venture and entry into the Japanese Market for Hollister."

In this article, we will concentrate on the markets outlined by the company, assuming that these are the largest expansions that the company will undertake in the coming year.

As can be seen, apart from China, all the countries are among the top 50 richest nations of the world and all the countries have achieved moderate growth in GDP. China has the lowest GDP per Capita in the above list but it has achieved the strongest real growth over the past few years. All the countries are expected to replicate this growth in the future.

Source: Economist Intelligence Unit

Australia has experienced moderate GDP growth in the recent past but its GDP per Capita is relatively higher than other economies in Asia and Australasia. The Australian retail sales also saw a large slump immediately after the 2008 crisis but is slowly recovering pace as consumer confidence is established and as the economy starts to recover.

The retail sector is the second largest employer of Australia and the sector directly contributes about 5% to the country's GDP. High immigration rates, increase in disposable incomes and growth in the number of single person households would likely cause growth in retail sales. The apparel sector is also expected to show steady volume growth in the coming years, but households are expected to switch to cheaper brands in order to reduce their debt burdens.

Source: Economist Intelligence Unit

In 2013, China will overtake the US to become the largest retail market in the world. China is expected to achieve a double digit growth in retail sales and this growth has become the focus of many retailers as they try to expand into the Chinese market in order to take advantage of this growth. Despite such a high expected growth rate, a move into China should be taken with caution. Chinese authorities have recently lowered their forecast for consumption growth and if China's emerging real-estate bubble bursts, the impact on retail sales might be substantial.

Expenditure on clothing in China would continue to grow fueled by an increase in disposable incomes and an increased focus on fashion apparel, especially in China's main cities. As a large number of brands move into China and local and foreign brands expand their coverage through a move into second and third tier cities and online accessibility, ANF is likely to face tough competition in the Chinese market. However, with a high expected growth in the market, a move into China would likely benefit the company.

Source: Economist Intelligence Unit

Japan is expected to remain the third largest retail market of the world, behind China and US, but the country is quickly losing ground to emerging markets such as India. The country is likely to see a slowing retail market in the future due to an uncertain economic outlook and a shrinking population. The Japanese market is generally easy to penetrate as half of the country's population is settled into the three largest urban centers. Furthermore, general homogeneity of the population means that retailers do not have to cater to various ethnic groups.

Japan will likely remain a cornerstone of the global fashion industry, with a number of internationally recognized designer names. In addition, Japanese street fashion continues to influence apparel and footwear in many other countries. However, an aging population and higher savings rate will make it difficult for any new entrant in the market to establish its presence. Thus, I would term ANF's move into Japanese market as risky due to the high level of competition and slowing consumer spending.

Source: Economist Intelligence Unit

South Korea is one of Asia's most dynamic and largest retail markets and is ranked as the 4th in Asia and Australasia region. The South Korean market has recently seen a slowdown largely due to the fallout of the euro zone crisis, and both the higher and lower income groups being affected by the crisis. However, around one-half of the country's population resides in or around the capital, Seoul, and a general liking of western goods, this looks to be a good market for ANF.

The apparel and footwear sales are expected to grow at 4.5% per annum over the next four years. However, as population growth slows, this rate is likely to fall in the future. South Korea is also an export dependent nation and as the eurozone crisis intensifies and other developed markets see a slow recovery, the average income level is likely to be affected adversely. If, however, the country is able to shift its focus towards emerging markets in Asia, then the general population's income would continue to see rapid growth, as achieved in the past. In my opinion, South Korea is one of the best opportunities for ANF's expansion into foreign markets.

Source: Economist Intelligence Unit

The UAE has one of the most advanced retail landscapes in the Gulf Cooperation Council. In the recent past, the country experienced high private consumption largely driven by high oil prices and high government spending. Also, the recent unrest in the region saw a great influx of visitors towards UAE.

The apparel industry in the UAE is very important as it attracts large amounts of investment. Well known brands are generally found in shopping malls as the majority of the population shops in malls. High disposable income, driven by high oil prices and a high growth in population is expected to cause a considerable growth in the apparel and footwear industry. However, this growth is likely to slow down in the later period due to higher inflation. However, due to a large presence of domestic as well as foreign brands, ANF would face fierce competition in the UAE retail market.

Conclusion

In my opinion, ANF revenue and earnings will likely grow in the future. Apart from Japan, all the countries exhibit strong fundamentals and growth prospects. As Japan is one of the largest retail markets in the world, and the majority of its population is concentrated around few cities, it might turn out to be a profitable venture for the company. In my opinion, ANF's move towards the large and growing markets in Asia should be seen as a growth driver for the company.

Based on my analysis of the market fundamentals, I would give a buy recommendation to Abercrombie & Fitch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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